29May13

OECD cuts world economic forecast

The recession-hit euro zone will fall further behind a generally improving United States
and a rebounding Japan this year, the OECD said on Wednesday, cutting its global
growth forecasts.

In its twice-yearly Economic Outlook, the Organisation for Economic Cooperation and
Development forecast the world economy would grow 3.1 percent this year before
accelerating to 4 percent in 2014.

The estimates marked a slightly more pessimistic view after in November the
Paris-based think tank forecast global growth of 3.4 percent this year and 4.2 percent
next year.

The United States was seen driving global growth with the world's biggest economy
projected to expand 1.9 percent this year and then accelerating to 2.8 percent in 2014,
which would be the country's best rate since 2005.

In contrast, the euro zone was estimated to remain in recession for a second year. The
OECD sees its economy contracting 0.6 percent in 2013 and then returning to growth
next year with a rate of 1.1 percent.

However, the outlook diverged widely within the 17-nation bloc with regional
powerhouse Germany seen achieving growth of 0.4 percent and rebounding to a rate of
1.9 percent in 2014.

After years of debt crisis testing the euro zone's capacity to hold together, OECD chief
economist Pier Paolo Padoan said that risks to the economic outlook have finally
begun to recede.

However, he warned that the easing in the euro zone's debt crisis may lead to reform
fatigue.

"As far as Europe is considered, we are concerned that complacency could set in,"
Padoan told Reuters. "That is a new risk that is coming up in Europe."

Unlike the United States in the 2008-09 financial crisis, the euro zone still needed to
tackle problems in its financial sector holding back the flow of credit, he said.

Central Bank Stimulus

Lifting its estimate for Japan, the OECD said that the central bank's pledge to ramp up
its monetary stimulus aggressively would help its economy grow 1.6 percent this year.

The OECD took a more pessimistic view on China, forecasting that its economy would
grow 7.8 percent this year, down from a previous estimate of 8.5 percent.

With economies in most countries still in recovery mode, the OECD said central banks
should keep monetary policies easy while the European Central Bank should even
dramatically step up its efforts to get credit flowing to the economy.

The OECD called on the ECB to make banks pay for holding deposits with it and urged
it to buy assets such as securitized loans from credit-starved small and medium-sized
firms, two options ECB policymakers say they are currently considering.

In the case of the U.S. Federal Reserve, the OECD said it may soon be justified to
begin curbing its purchases of government bonds and mortgage-backed securities

However, it warned that a slower pace of purchases would have to be carefully flagged
to markets in order to avoid an abrupt sell-off by other investors that might cause yields
to spike dangerously higher.

The OECD not only gave its blessing to the Bank of Japan's dramatic increase in
monetary surplus but said further moves could be used to boost the economy.

It noted improvement in Britain's pace of fiscal consolidation in both 2013 and 2014, but
repeated the concern mentioned by the International Monetary Fund last week that a
Help to Buy program might end up pushing house prices up.

[Source: By Leigh Thomas, Reuters, Paris, 29May13]

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